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Are fiat currencies dead? [CeFi or DeFi, Part Two]

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I said yesterday that, for the moment, I’ll stick with fiat currencies as cryptocurrencies are generally quite messy when used for retail purchases. And no, I’m not speaking as an observer but as a user. To buy my Watford football shirt, I had to open an account with a crypto app – which I’ve never used since – then work out how to add an amount of bitcoin to that app, and then how to send that bitcoin to Watford. It wasn’t easy.

This is why many pundits predict the death of cryptocurrencies, with bitcoin being the one most regularly attacked:

“I’m a major sceptic on crypto tokens, which you call currency, like Bitcoin, They are decentralized Ponzi schemes.” Jamie Dimon, JPMorgan Chase Chairman

Bloomberg, September 2022

Interestingly, if you look at the converse side of the discussion, there are as many articles predicting the death of fiat currencies*.

The USD when the money supply shoots up like a missile as has occurred since 2008? It loses even more value and will eventually and inevitably collapse … and the average lifespan of a fiat currency is about 35 years.

Source: The Gini Foundation

I actually began thinking about this the other day when reading a few articles about fiat currencies. The first that struck me was from Daily Fintech claiming that bitcoin is inevitable and the failure of fiat is also inevitable.

Ted Reese, who describes himself as “a Marxist and author of: Socialism or Extinction”, builds on this theme:

Fiat currency is dying a natural death — its logical replacement is a digital voucher system fixed to labour time

British pound sterling has devalued by more than 99.5% since the year it was founded (1694). The US dollar, the global reserve currency, has lost 96% of its purchasing power since 1913, having barely lost any before then. The figure is 91% when the starting point is taken from 1947, when the US became the world’s leading imperialist power; and 85% since 1970. That means today’s dollar was worth nine cents in 1949 and 15 cents in 1970. The dollar’s rate of inflation has been 3.92% per year since 1970, compared to 0.46% per year before then. Even the Chinese renminbi in 2019 was worth only 22% of its 1987 equivalent … the threat of worldwide hyperinflation looms and fits historically and logically with the devaluation of the past 100 years. Worldwide hyperinflation would see the worth of all fiat currencies collapse against precious metals.

Katusa Research, an independent research firm also agree that the financial systems broken. It has been through a lengthy process of Quantitative Easing since 2008 – a license to print money – and is now going through the opposite process of Quantitative Tightening. The article argues that gold, silver and cryptocurrencies are a far better bet than USD and its equivalents.

Daily Fintech agrees, stating that the solution to solve the weaknesses of fiat currencies is bitcoin for a variety of reasons, such as the removal of intermediaries and the proof system for trust. One argument that rings true is specifically because:

Thing is that some would say this view is so last year. bitcoin prices broke through in 2021 and now, in 2022, most people seem to be jumping out of crypto. This is due to a winter of enthusiasm ending when Terra-Luna collapsed, soon followed by Celsius and now FTX.

Gold seems far more stable. Gold Money agrees, also postulating the end of fiat:

All currencies are now state-issued fiat, vulnerable to a schism between their purchasing power and that of gold. The escape from these unsound characteristics will undoubtedly be into metallic money, that is gold and silver, when public confidence in fiat finally disappears. That is not yet the current situation.

In a separate piece, Gold Money goes on to say:

From London’s big bang in the mid-eighties, the major currencies, particularly the US dollar and sterling became increasingly financialised. It occurred at a time when production of consumer goods migrated to Asia, particularly China. The entire focus of bank lending and loan collateral moved towards financial assets and away from production. And as interest rates declined, in general terms these assets improved in value, offering greater security to lenders, and reinforcing the trend.

This is now changing, with interest rates set to rise significantly, bursting a financial bubble which has been inflating for decades. While bond yields have started to rise, there is further for them to go, undermining not just the collateral position, but government finances as well. And further rises in bond yields will turn equity markets into bear markets, potentially rivalling the 1929-1932 performance of the Dow Jones Industrial Index.

That being the case, the collapse already underway in the yen and the euro will begin to undermine the dollar, not on the foreign exchanges, but in terms of its purchasing power. We can be reasonably certain that the Fed’s mandate will give preference to supporting asset prices over stabilising the currency, until it is too late.

Interesting.

Finally, our Marxist friend Ted Reese’s solution is more socialistic and argues against any currency backed by government to be replaced with currencies backed by labour:

In Critique of the Gotha Programme, Marx explains that under socialism workers would be paid in vouchers or certificates and then draw down entitlements (use them to purchase and consume goods). Such vouchers, or labour credits, would be non-transferable, cancelled once spent, like train tickets. So while socialism would incentivise and reward work, it would also prevent most wealth from accumulating in the hands of a few. Economic exploitation would be abolished and labour power decommodified.

All interesting pieces, but each one comes from their angle of bias, either pushing cryptocurrencies or precious metals or socialist principles. But then, when I read about bitcoin’s death and related articles, I feel the same is true when most authors are coming from a central bank, a bank or a governmental view.

Both could be right, which is why we continue this discussion of CeFi or DeFi or both.

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Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...

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